The UKs Economic Rebalancing Remains Elusive

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Economic growth strengthened in the second quarter, despite weaker manufacturing

The UK’s real GDP growth rate picked up to 0.7% in the three months to June, the strongest since late last year, from 0.4% previously, according to the first estimate out on Tuesday. By sector, the largest contribution was from services, followed by production.

 

Within production, mining and quarrying surged. The main driver was a large bounce back in the extraction of crude petroleum and natural gas, suggesting activity got a boost from the upward trend in oil prices in the first half of the year and/or measures supporting the industry in the UK Budget.

 

In contrast, manufacturing fell for the first time in more than two years. The largest drag was from metals, followed by coke and refined petroleum products, as well as mechanical equipment. The common factor between these diverse sectors is that they are all embedded in the oil & gas supply chain, which has struggled since H2 2014. The uptick in oil & gas extraction during Q2 2015 will likely filter through the supply chain with a lag.

 

Demand for metals has also been under pressure from the subdued recovery in the euro zone, one of the UK’s key markets for such manufactures, and the recent appreciation of the pound against the euro. More surprising is the weakness in consumer goods, like food & drink, despite low inflation and rising wages. This could suggest that political uncertainty prior to the general election in May might have prompted households to postpone spending.

 

On the bright side, the transport sectors continue to drive growth in UK manufacturing. The motor vehicles sector looks to have bucked the weakness in consumer goods during Q2 while the other transport sector is benefiting from long-term orders as well as its resilience to exchange rate flunctuations.

 

Manufacturing is likely to pick up slightly later this year as the U.K.’s key export markets, such as the euro zone, recover. Yet the sector will remain under pressure from a strong pound, the renewed weakness in oil prices, as well as the slowdown in China.

 

 

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